Bernanke Urges Congress to Act Now on Overhaul

FILE - In this Oct. 1, 2009 file photo, Federal Reserve Board Chairman Ben Bernanke testifies on...

FILE - In this Oct. 1, 2009 file photo, Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington before the House Financial Services Committee. The Federal Reserve for the first time would police banks' pay policies to ensure they don't encourage employees to take reckless gambles like those that contributed to the financial crisis, according to a proposal unveiled Thursday, Oct. 22. (AP Photo/Evan Vucci, file)

(AP)

Federal Reserve Chairman Ben Bernanke prodded Congress Friday to enact legislation overhauling the nation's financial regulatory system to prevent a repeat of the banking and credit debacles that had thrust the country into crisis.

"With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises," Bernanke said in remarks to a Fed conference in Chatham, Mass.

For its part, the Fed has been taking steps to strengthen oversight of banks, sharpen consumer protections and on Thursday unveiled a sweeping proposal to police banks' pay policies to make sure they don't encourage top executives and other employees to take reckless gambles.

But Congress needs to step in and close regulatory gaps and make other changes that only lawmakers have the power to do, Bernanke said.

At the top of his list: Congress must set up a mechanism — along the lines of what the Federal Deposit Insurance Corp. does with troubled banks — to safely wind down big financial firms whose failure could endanger the entire system.

And the costs for such a mechanism should be paid through an assessment on the financial industry, not by taxpayers, Bernanke said.

Moreover, Congress needs to set up better systems for regulators to monitor risks lurking in the financial system, he said.

The Obama administration has proposed such action as part of its overhaul of financial rules. Its plan would expand the Fed's powers over big financial institutions but reduce it over consumers. Congress, however, is leery of expanding the Fed's reach because it and other regulators failed to crack down on problems that led to the crisis.

The House is expected to pass legislation by the end of the year, but the Senate is unlikely to consider the bill until early next year.

A House panel on Thursday approved a piece of the plan, creating a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate hikes. Doing so, however, strips some powers from the Fed.